Underwriting
The process where an individual or institution agrees to purchase a specified number of shares or debentures in exchange for a fee, known as the underwriting commission.
Underwriting Agreement
An arrangement, commonly used by public companies during an initial public offering (IPO), that ensures if the public does not fully subscribe to the offered shares or debentures, the underwriters will step in to buy the remaining securities.
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Underwriting
The process where an individual or institution agrees to purchase a specified number of shares or debentures in exchange for a fee, known as the underwriting commission.
Underwriting Agreement
An arrangement, commonly used by public companies during an initial public offering (IPO), that ensures if the public does not fully subscribe to the offered shares or debentures, the underwriters will step in to buy the remaining securities.
Underwriting commission
The compensation provided to underwriters for their role in underwriting shares or debentures of a public company, calculated based on the issue price of the securities underwritten.
Advantage of Underwriting
Guarantees the sale of shares and debentures, ensuring the company's capital subscription is certain.
Complete Underwriting
The entire issue of shares or debentures of a company is underwritten by one or more underwriters.
Partial Underwriting
Only a portion of the issue of shares or debentures is underwritten.
Pure/Open Underwriting
Underwriters agree to take up shares or debentures of a company only if the public does not fully subscribe to them.
Firm Underwriting
Underwriters commit to purchasing a specific number of shares or debentures from the company, regardless of the public subscription.
Underwriters
Individuals or institutions responsible for underwriting public issues of shares and debentures, required to hold a certificate issued by SEBI to act in this capacity.
Sub-underwriters
Underwriters appointed by the primary underwriter to assist them in their tasks and do not have a direct contract with the company.
Brokers
Assist in selling shares or debentures but do not guarantee the purchase of any unsubscribed shares, receiving brokerage as compensation.
Liability of underwriters
The obligation to subscribe to a specific number of shares as stipulated in the underwriting agreement, classified into Gross liability and Net liability.
Gross liability
The obligation underwriters have to sell a certain number of shares to the public, as specified in the underwriting agreement.
Net liability
The number of shares each underwriter must purchase when the public does not fully subscribe to the offering.
Marked Applications
Applications that bear an underwriter's stamp, allowing the company to identify which underwriter is responsible for each application.
Unmarked Applications
Applications that do not bear any underwriter's stamp and are submitted directly to the company by the public.
Firm Underwriting Applications Credit Given
Credit assigned to individual underwriters, which is first deducted from their gross liability, later added back after determining the underwriter's liability
Firm Underwriting Applications Credit Not Given
Applications treated as unmarked applications if firm underwriting credit is not assigned to individual underwriters.
IPO (Initial Public Offering)
The first time a company offers its shares to the public on the stock exchange.
AOA (Articles of Association)
A legal document that contains the rules and regulations governing the internal management of a company.
Register
An official list or record maintained by a company or organization.
Prospectus
A legal document issued by a company that provides details about its business operations, financial performance, management team, and the securities being offered to the public.
Private Equity
Investments made in privately held companies that are not publicly traded on the stock exchange.
Debenture
A long-term security yielding a fixed rate of interest, issued by a company as a funding option to avoid diluting equity.
Debenture (as per Companies Act, 2013)
Includes Debentures Stocks, Bonds, or any instrument evidencing a company's debt, whether constituting a charge on assets or not.
Objectives of Debentures
Raising capital, leveraging benefits without diluting ownership, providing fixed interest payments, offering tax benefits, attracting investors, providing flexible terms, improving creditworthiness, and maintaining control.
Unsecured Debentures
Debentures with no security regarding principal and unpaid interest; also called simple debentures.
Secured or Mortgage Debentures
Debentures secured by a charge on the company's assets, giving holders the right to recover their principal and interest from mortgaged assets.
Redeemable Debentures
Debentures issued for a fixed period, where the company agrees to repay the borrowed amount on a certain date.
Non-Redeemable Debentures
Debentures that do not hold the issuer liable to repay in full by a certain date; also known as perpetual debentures.
Registered Debentures
Debentures issued to holders registered with the company, not negotiable and requiring a regular instrument of transfer.
Bearer Debentures
Debentures not registered with the issuer, easily transferable by delivery, with the owner (bearer) entitled to interest.
Convertible Debentures
Debentures that can be converted into equity shares after a specified period.
Non-Convertible Debentures
Traditional debentures that cannot be converted into equity, typically offering a higher interest rate.
First Debentures
Debentures that are repaid before other debentures.
Second Debentures
Debentures that are paid after the first debentures are paid back.
Issue of Debentures
Similar to the issue of shares, involving a prospectus, application invitations, and allotment based on conditions; can be issued for cash or other considerations.
Writing off Discount on Issue of Debentures
Typically treated as a capital loss or fictitious asset, written off over the debentures' lifetime, charged to Securities Premium A/c or Profit and Loss A/c.
Fixed Installment Method (Discount on Issue)
Spreading the total discount equally over the life of the debentures, writing off a fixed amount each year.
Fluctuating Installment Method (Discount on Issue)
Writing off the discount in proportion to the debentures outstanding at the beginning of each year, diminishing over time.
Debenture Deed
Certificate issued under company seal which is a certificate of debt with the date of redemption and amount of repayment mentioned on it
Redemption of Debentures
The process of repaying the debenture holder.
Debenture
Debt instrument used by a company to raise capital by borrowing money from the public.
Redeem Debentures at Par
Repayment of debenture happens at the face value of the debenture.
Redeem Debentures at Premium
Repayment of debenture happens at a higher amount than the initial issued amount.
Lump-Sum Payment on a Prefixed Date
Debenture holders receive the promised sum on the prefixed date.
Payment in Annual Installment
Companies pay a portion of a debenture’s principal each year to holders until its maturity date.
Call Option
Enables companies to purchase their debenture either before or on the maturity date at a predetermined price.
Put Option
Debenture holders have the right to sell the debenture back to the company at an agreed price, either before or on the maturity date.
Conversion into Shares
Enables holders to convert their units into the company’s ordinary equity shares.
Buy from the Open Market
Companies can purchase debentures from an open market if their units are being traded on a regulated exchange.
Cumulative Sinking Fund
A popular type of sinking fund where the interest earned on sinking fund investments is also reinvested again.
Non-Cumulative Sinking Fund
The interest earned on sinking fund investments will not be reinvested again.
Sinking Fund Account
Reserve that is built by accumulating at least 25% of the face value of debenture every year until its maturity.
Sinking Fund Investment Account
The investments made every year with the amount of annual appropriation will be debited to this account.
Interest on Sinking Fund Investment Account
Every year the interest received on Sinking Fund Investments will be credited to this account.
Insurance Policy Method
A fixed amount of premium is paid every year to the insurance company to take provision for redemption of debentures.
Open Market
Purchasing own debentures from the stock market.
Goodwill
An intangible asset associated with the purchase of one company by another, representing a competitive advantage.
Accounting Standard (AS-10)
Requires goodwill to be recorded in the books.
Goodwill definition
The portion of the purchase price that is higher than the sum of the net fair value of all the assets purchased in the acquisition and the liabilities assumed in the process.
Negative Goodwill
Arises when the acquiring company pays less than the target’s book value in a distress sale. In other words, purchased the company at a bargain.
Intangible Asset
An asset that is not physical, like buildings or equipment (e.g., goodwill).
Super Profits
Excess of profits over the normal profits earned by similar firms in the industry.
Premium Method in Accounting
Used when a new partner brings in cash against goodwill, which is then adjusted in the old partners’ capital accounts.
Revaluation Method in Accounting
Allows a newcomer to become a partner without paying for goodwill, but the goodwill is worked out, valued, and adjusted to the old partners' capital accounts in the old profit-sharing ratio.
Memorandum Revaluation Method
The newcomer does not bring in any amount as goodwill. The goodwill is first raised by crediting the old partners’ capital accounts in the old profit-sharing ratio and after the admission, the goodwill is written off among all the partners, including the new partner, in the new profit-sharing ratio.
Average Profit Method
A simple method for calculating goodwill where past profits are averaged and multiplied by the number of years of purchase.
Weighted Average Profit Method
A modified version of the simple average profit method, used when profits show a continuous increasing trend over the years.
Super Profit Method
Compares the average/real profits with the normal profit for the same capital in the same type of business.
Capitalization Method
Goodwill Calculation either by capitalization of Super Profit or Average Profit.
Annuity Method
Method of goodwill valuation that takes into account the loss of interest on the amount paid for goodwill. The amount paid for the goodwill in lump sum will be recovered in the coming years
Purchase Method
When payment is made in excess of net assets acquired for that purpose; such excess payment is known as Purchased Goodwill.
Non-Purchased Goodwill/Inherent/ Latent Goodwill
Internally generated goodwill and it arises over a period of time due to the good reputation of a business.It is not purchased for cash consideration. Hence it is not recorded in the books of accounts like Purchased Goodwill.
Purchase Consideration
The amount payable by the purchasing company to the vendor company for taking over the assets and liabilities of Vendor Company.
Current Assets
It refers to the assets of a company which can be converted into cash in any given fiscal year such as cash, cash equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets.
Capital Employed
The total funds deployed for running the business with the intent to earn profits and is usually calculated by adding working capital to fixed assets.